There are some great deals to be made for savvy investors who have the time and patience to pursue short sales. But those deals can quickly turn to financial disaster for the uninformed buyer, or even the informed buyer who is working with an inexperienced real estate agent.
Short sale investors planning to 'flip', or resell the property immediately should be aware of the terms and conditions of the lenders approval letter. Many lenders and servicers (like Citi, BOA, Chase and Wells Fargo) include resale restrictions within the terms of the approval which can prevent a buyer from immediately reselling it, effectively destroying any profit margin an investor might have had.
Still other investors take a longer term view and purchase short sales intending to hold them as rental properties. After all, what better way earn great returns than to have tenants both pay down your mortgage AND provide a monthly income. It's important to note though that those same mortgage servicers often include property use restrictions in the approval letter that prevent a buyer from leasing the property back to the current seller. Some lenders even require signed affidavits documenting that a lease back will not occur. Some of the more stringent lenders will take it even a step further, allowing only owner occupancy of the property, and preventing any rental use at all.
Another concern for investors is the time commitment of buying a short sale property. Even during a sellers market, in which we regularly see homes go from list to close in under 30 days, short sale transactions, especially those with the larger servicers, can take 45 - 60 days just to get approval, then another 30 - 60 days to close. And if you're working with a seller who has simply given up and is not being responsive to documentation requests, those deals can fall apart and be foreclosed on long before it ever gets to the closing table.
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Lastly, investors planning to purchase short sales need to pay special attention to applicable disclosures. Investors will be required to disclose that they are investors and what their plans are for the property. Additionally, there are often times second lien holders that may or may not agree to a short sale, or may require a cash settlement as a condition of agreeing to the terms and conditions of the short sale. What's more, that cash settlement must be disclosed to the first lien holder as part of the approval process.
In a market flooded with qualified buyers who are driving prices through the roof, short sales provide a great avenue for investors to pick up properties well below market value. Homebuyers either don't want to or can't wait for the long drawn out closings that short sales entail. For the patient investor, it's cherry pickin' time... but only so long as they, and their agents do their homework. Nobody wants to put in work, only to have the deal fall out down the road over restrictions or mistakes.